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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 333-25269
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
New York 93-1225432
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
125 Wolf Road, Albany, New York 12205
(Address of principal executive offices) (Zip Code)
(518) 437-1816
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 2001, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2001, 2,500 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
Note: This Form 10-K is filed by the registrant only as a consequence of the
sale by the registrant of a market value adjusted annuity product.
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................
A. Organization and Corporate Structure.........................
B. Business of the Company .....................................
C. Employee Benefits ...........................................
D. Financial Services......................................................
E. Investments ............................................................
F. Regulation...................................................
G. Ratings......................................................
H. Miscellaneous................................................
Item 2. Properties............................................................
Item 3. Legal Proceedings.....................................................
Item 4. Submission of Matters to a Vote of Security Holders...................
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................
A. Equity Security Holders and Market Information...............
B. Dividends....................................................
Item 6. Selected Financial Data...............................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................
A. Company Results of Operations................................
B. Employee Benefits Results of Operations......................
C. Financial Services Results of Operations.....................
D. Investments..................................................
E. Liquidity and Capital Resources..............................
F. Accounting Pronouncements....................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............
Item 8. Financial Statements and Supplementary Data...........................
26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................
PART III
Item 10. Directors and Executive Officers of the Registrant....................
A. Identification of Directors..................................
B. Identification of Executive Officers.........................
Item 11. Executive Compensation................................................
A. Compensation of Executive Officers...........................
B. Compensation of Directors....................................
Item 12. Security Ownership of Certain Beneficial Owners and Management........
A. Security Ownership of Certain Beneficial Owners..............
B. Security Ownership of Management.............................
Item 13. Certain Relationships and Related Transactions........................
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......
A. Index to Financial Statements................................
B. Index to Exhibits............................................
C. Reports on Form 8-K..........................................
Signatures......................................................................
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
First Great-West Life & Annuity Insurance Company (the "Company") is a stock
life insurance company organized under the laws of the State of New York in
1996.
The Company is a wholly-owned subsidiary of Great-West Life & Annuity Insurance
Company ("GWL&A"), a life insurance company domiciled in Colorado. GWL&A is a
wholly-owned subsidiary of GWL&A Financial Inc. ("GWL&A Financial"), a Delaware
holding company. GWL&A Financial is an indirect wholly-owned subsidiary of
Great-West Lifeco Inc. ("Lifeco"), a Canadian holding company. Lifeco is a
subsidiary of Power Financial Corporation ("Power Financial"), a Canadian
holding company with substantial interests in the financial services industry.
Power Financial Corporation is a subsidiary of Power Corporation of Canada
("Power Corporation"), a Canadian holding and management company. Mr. Paul
Desmarais, through a group of private holding companies, which he controls, has
voting control of Power Corporation.
Shares of Great-West Lifeco, Power Financial and Power Corporation are traded
publicly in Canada.
B. BUSINESS OF THE COMPANY
The Company is authorized to engage in the sale of life insurance, annuities,
and accident and health insurance. The Company became licensed to do business in
New York and Iowa in 1997.
The Company operates in the following two business segments:
Employee Benefits - life, health, and 401(k) products for group clients
Financial Services - savings products for both public and non-profit
employers and individuals and life insurance products for individuals
and businesses
The table that follows summarizes premiums and deposits for the years indicated.
For further information concerning the Company, see Item 6 (Selected Financial
Data), and Item 8 (Financial Statements and Supplementary Data). For commentary
on the information in the following table, see Item 7 (Management's Discussion
and Analysis of Financial Condition and Results of Operations).
For the years ended
---------------------------------------------
[Thousands] (1) 2000 1999 1998
------------ ------------ -------------
Premiums Income
Employee Benefits
Group Life & Health $ 13,467 $ 9,195 $
------------ ------------ -------------
Total Employee Benefits 13,467 9,195
------------ ------------ -------------
Financial Services
Savings (11) (8) (4)
Individual Insurance 109 (43) (61)
------------ ------------ -------------
Total Financial Services 98 (51) (65)
------------ ------------ -------------
Premium Income $ 13,565 $ 9,144 $ (65)
============ ============ =============
Fee Income
Employee Benefits
Group Life & Health $ 6,213 $ 430 $
401(k) 2
------------ ------------ -------------
Total Employee Benefits 6,215 430
------------ ------------ -------------
Financial Services
Savings 362 262 143
Individual Insurance
------------ ------------ -------------
Total Financial Services 362 262 143
------------ ------------ -------------
Fee Income $ 6,577 $ 692 $ 143
============ ============ =============
Deposits for investment-type
contracts (2)
Financial Services $ 37,344 $ 20,000 $ 62,528
------------ ------------ -------------
Total Investment-type
deposits $ 37,344 $ 20,000 $ 62,528
============ ============ =============
Deposits to Separate Accounts
Employee Benefits $ 3,249 $ $
Financial Services 11,189 9,389 12,776
------------ ------------ -------------
Total separate accounts
deposits $ 14,438 $ 9,389 $ 12,776
============ ============ =============
============ ============ =============
Self-funded equivalents (3) $ 16,225 $ $
============ ============ =============
(1) All information in the above table and other tables herein is derived from
information that has been prepared in conformity with accounting principles
generally accepted in the United States of America, unless otherwise
indicated.
(2) Investment-type contracts are contracts which include significant cash
build-up features, as discussed in FASB Statement No. 97.
(3) Self-funded equivalents generally represent paid claims under minimum
premium and administrative services only contracts, which amounts
approximate the additional premiums that would have been earned under such
contracts if they had been written as traditional indemnity or HMO
programs.
C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range of employee
benefits products. The Company began operating in this segment as of December 1,
1999 by entering into an assumption reinsurance agreement with Anthem Health &
Life Insurance Company of New York ("AH&L NY"), to acquire a block of life and
health insurance business. The business primarily consists of administration
services only and stop loss policies. In 2000, the Company began writing new
employee benefits business and reported a 5.2% increase in health insurance
annualized premium equivalents to $41.7 million. In 2001, the Company will
continue its focus on writing new employee benefits business.
The Company offers customers a variety of health plan options to help them
maximize the value of their employee benefits package. The majority of the
Company's health care business is self-funded, whereby the employer assumes all
or a significant portion of the risk. For companies with better than average
claims experience, this can result in significant health care cost savings.
The Company offers employers a total benefits solution - an integrated package
of group life and disability insurance, managed care programs, and flexible
spending accounts. The Company began marketing 401(k) savings plans in 2000 to
complement its group life and health products. Through integrated pricing,
administration, funding, and service, the Company helps employers provide
cost-effective benefits that will attract and retain quality employees, and at
the same time, helps employees reach their personal goals by offering benefit
choices, along with information needed to make appropriate choices. Many
customers also find this integrated approach appealing because their benefit
plans are administered through a single company with linked systems that provide
on-line administration and account access, for enhanced efficiency and
simplified plan administration.
The Company offers a choice of managed care products including Preferred
Provider Organization ("PPO") plans and Point of Service ("POS") plans. PPO
plans offer members a greater choice of physicians and hospitals. Members do not
need to enroll with a primary care physician - they simply select a contracted
PPO provider at the time of the service to receive the highest level of
benefits. If members seek care outside of the PPO network, they receive a lower
level of benefits.
POS plans require that a member enroll with a primary care physician who is
responsible for coordinating the member's health care. Members receive the
highest benefit coverage and the lowest out-of-pocket costs when they use their
primary care physician to coordinate their health care. Members can seek care
outside of the primary physician's direction, at a reduced level of benefits.
Some benefits may not be covered outside the in-network POS plan.
The Company offers Internal Revenue Code Section 125 plans which enable
participants to set aside pre-tax dollars to pay for non reimbursed medical
expenses and dependent care expenses. This creates tax efficiencies for both the
employer and its employees.
The Company offers group life insurance. Sales of group life insurance consist
principally of renewable term coverage, the amounts of which are usually linked
to individual employee wage levels. Group life insurance in force prior to
reinsurance ceded to other insurance enterprises for the year ended December 31,
2000 totaled $674 million.
The Company offers disability insurance which is a type of health insurance
designed to compensate insured people for a portion of the income they lose
because of a disabling injury or illness. Generally, benefits are in the form of
monthly payments.
The Company's 401(k) product is offered by way of a group fixed and variable
deferred annuity contract. The product provides a variety of funding and
distribution options for employer-approved retirement plans that qualify under
Internal Revenue Code Section 401(k).
The 401(k) product investment options for the employer include guaranteed
interest rates for various lengths of time and variable investment options. For
the fully guaranteed option, the difference between the income earned on
investments in the Company's general account and the interest credited to the
participant's account balance flows through to operating income.
Variable investment options utilize separate accounts to provide participants
with a vehicle to assume the investment risks. Assets held under these options
are invested, as designated by the participant, in separate accounts which in
turn invest in shares of underlying funds managed by a subsidiary of the Company
or by selected external fund managers.
The Company is compensated by the separate accounts for bearing expense risks
pertaining to the variable annuity contract, and for providing administrative
services.
Customer retention is a key factor for the profitability of the Company's 401(k)
product. The annuity contract imposes a charge for termination during a
designated period of time after the contract's inception. The charge is
determined in accordance with a formula in the contract. Existing federal tax
penalties on distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of account balances, but do not impact
rollovers to products of competitors.
The Company offers a rollover Individual Retirement Account, which allows
individuals to move retirement funds from a 401(k) plan to a qualified
Individual Retirement Account.
2. Method of Distribution
The Company distributes its products and services through affiliated sales
staff. Each sales office works with insurance brokers, agents, and consultants
in their local market.
3. Competition
The employee benefits industry is highly competitive. The United States health
care industry continues to experience mergers and consolidations. A number of
larger carriers have dropped out of the group health market entirely. Although
there are still many different carriers in the marketplace, it has become
dominated by an increasingly smaller number of carriers.
The highly competitive marketplace creates pricing pressures, which encourage
employers to seek competitive bids each year. Although most employers are
looking for affordably priced employee benefits products, they want to offer
product choices because employee needs differ. In many cases, it is more
cost-effective and efficient for an employer to contract with a carrier such as
the Company, which offers multiple product lines and centralized administration.
In addition to price, there are a number of other factors, which influence
employer decision-making. These factors include quality of service; scope,
cost-effectiveness and quality of provider networks; product responsiveness to
customers' needs; cost-containment services; and effectiveness of marketing and
sales.
4. Reserves
For group term insurance products, policy reserve liabilities are equal to the
present value of future benefits and expenses less the present value of future
net premiums using best estimate assumptions for interest, mortality, and
expenses (including margins for adverse deviation). For disability waiver of
premium contracts, the policy reserves equal the present value of future
benefits and expenses using best estimate assumptions for interest, mortality,
and expenses (including margins for adverse deviation). Reserves for long-term
disability products are established for lives currently in payment status, or
which are approved for payment but are in a waiting period, using industry and
Company morbidity factors, and interest rates based on Company experience. In
addition, reserves are held for claims that have been incurred but not reported.
For medical, dental, and vision insurance products, reserves reflect the
ultimate cost of claims including, on an estimated basis, (i) claims that have
been reported but not settled, and (ii) claims that have been incurred but not
reported. Claim reserves are based upon factors derived from past experience.
Reserves also reflect retrospective experience rating that is done on certain
types of business.
Assumptions for mortality and morbidity experience are periodically reviewed
against published industry data and company experience.
The above mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, pay expected death surrender requests, and to generate profits.
5. Reinsurance
The Company seeks to limit its exposure on any single insured and to recover a
portion of benefits paid by ceding risks to other insurance enterprises under
excess coverage and coinsurance contracts. The maximum amount of group life
insurance retained on any one life is $250 thousand.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services segment primarily markets savings products to public and
not-for-profit employers and individuals and offers life insurance products to
individuals and businesses.
The Company's fixed annuity product is a Guarantee Period Fund, which was
established as a non-unitized Separate account in which the owner does not
participate in the performance of the assets. The assets accrue solely to the
benefit of the Company and any gain or loss in the Guarantee Period Fund is
borne entirely by the Company. Guarantee period durations of one to ten years
are currently being offered by the Company. Distributions from the amounts
allocated to a Guarantee Period Fund more than six months prior to the maturity
date results in a market value adjustment ("MVA"). The MVA reflects the
relationship as of the time of its calculation between the current U.S. Treasury
Strip ask side yield and the U.S. Treasury Strip ask side yield at the inception
of the contract.
The Company's variable annuity products offer a number of investment options.
This product provides the opportunity for contractholders to assume the risks
of, and receive all the benefits from, the investment of retirement assets. The
variable product assets are invested, as designated by the participant, in a
separate account which in turn invests in shares of underlying funds managed by
selected external fund managers.
The fixed annuity product generates earnings from the investment spreads on
guaranteed investment returns. The variable annuity product generates earnings
from the fees collected for mortality and expense risks associated with the
variable options.
The amount of annuities in-force is measured by account balances. At December
31, 2000, annuity account balances were $141 thousand for fixed annuities and
$44.1 million for variable annuities. At December 31, 1999, annuity account
balances were $119 thousand for fixed annuities and $39.9 million for variable
annuities.
During 1998, the Company began selling life insurance products in the
Business-Owned Life Insurance ("BOLI") market. These products are
interest-sensitive whole life products which fund post-retirement benefits for
bank employees. BOLI deposits of $37 million were received in 2000, representing
$468.5 million of life insurance in-force.
2. Method of Distribution
The Company distributes its annuity products through Charles Schwab & Co., Inc.
pursuant to a distribution agreement. The Company's BOLI product is currently
marketed through one broker, Clark/Bardes, Inc.
3. Competition
The individual life and annuity insurance marketplace is highly competitive. The
Company's competitors include mutual fund companies, insurance companies, banks,
investment advisors and certain service and professional organizations. No one
competitor or small number of competitors is dominant. Competition focuses on
service, technology, cost, variety of investment options, investment
performance, product features, price and financial strength as indicated by
ratings issued by nationally recognized agencies. For more information on the
Company's ratings see Item 1(G) - Ratings.
4. Reserves
Reserves for interest-sensitive whole life products are equal to cumulative
deposits less withdrawals and charges plus credited interest. For all life
insurance contracts, reserves are established for claims that have been incurred
but not reported based on factors derived from past experience.
Reserves for investment contracts (deferred annuities and immediate annuities
without life contingent payouts) are equal to cumulative deposits plus credited
interest less withdrawals and other charges.
The above-mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, and pay expected death or retirement benefits or surrender requests.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and coinsurance contracts. The Company retains
a maximum of $250 thousand of coverage per individual life.
E. INVESTMENTS
GWL&A manages the Company's general and separate accounts in support of cash and
liquidity requirements of the Company's insurance and investment products.
Invested assets under management at year-end 2000 totaled $213.9 million,
comprised of $166.5 million of general account assets and $47.4 million of
separate account assets. Invested assets under management at year-end 1999
totaled $152.7 million, comprised of $112.8 million of general account assets
and $39.9 million of separate account assets.
The invested assets of the Company include a broad range of asset classes, such
as public and privately placed corporate bonds, government bonds and
mortgage-backed and asset-backed securities. The assets of the Company are
managed to reflect the underlying characteristics of related insurance products.
The assets of the Company are routinely monitored and evaluated in light of
current economic conditions, trends in capital markets and other factors. These
other factors include investment size, quality, concentration by industry and
other diversification considerations for fixed maturity investments.
F. REGULATION
1. Insurance Regulation
The Company must comply with the insurance laws of New York and Iowa. These laws
govern the admittance of assets, premium rating methodology, policy forms,
establishing reserve requirements and solvency standards, maximum interest rates
on life insurance policy loans and minimum rates for accumulation of surrender
values and the type, amounts and valuation of investments permitted.
The Company's operations and accounts are subject to examination by the New York
Insurance Department at specified intervals.
New York has adopted the National Association of Insurance Commissioners'
risk-based capital rules and other financial ratios for life insurance
companies. Based on the Company's December 31, 2000 statutory financial reports,
the Company has risk-based capital well in excess of that required.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles (Codification). The
Codification, which is intended to standardize accounting and reporting to state
insurance departments, is effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state laws
and permitted practices. The New York Insurance Department will require adoption
of Codification with certain modifications for the preparation of statutory
financial statements effective January 1, 2001.
2. Insurance Holding Company Regulation
The Company is subject to and complies with insurance holding company
regulations in New York. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
3. Securities Regulation
The Company is subject to various levels of regulation under federal securities
laws. The Company's separate accounts and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
4. Potential Legislation
United States federal and state legislation and administrative regulation in
various areas, including pension, financial services, health care and insurance
could significantly and adversely affect the Company in the future. Congress has
from time to time considered legislation relating to health care reform and
managed care issues (including patients' rights, privacy of medical records and
managed care plan or enterprise liability), changes in the deferral of taxation
on the accretion of value within certain annuities and life insurance products,
changes in regulation for the Employee Retirement Income Security Act of 1974,
as amended, and changes as to the availability of Section 401(k) for individual
retirement accounts.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of the Company will be enacted and, if enacted, the
extent to which such legislation or regulation will have an effect on the
Company and its competitors.
G. RATINGS
The Company is rated by a number of nationally recognized rating agencies. The
ratings represent the opinion of the rating agencies on the financial strength
of the Company and its ability to meet the obligations of its insurance
policies. The ratings take into account an agreement whereby GWL&A has
undertaken to provide the Company with certain financial support related to
maintaining required statutory surplus and liquidity.
Rating Agency Measurement Rating
----------------------------------- ----------------------------- --------------
A.M. Best Company Financial Condition and AA+ *
Operating Performance
Fitch, Inc. Claims Paying Ability AAA *
Standard & Poor's Corporation Financial Strength AA **
Moody's Investors Service Financial Strength Aa3 ***
* Highest ratings available.
** Third highest rating out of 21 rating categories. *** Fourth highest
rating out of 21 rating categories.
H. MISCELLANEOUS
Significant BOLI deposits were received during 2000. Although the Company's BOLI
business is comprised of a few customers, which account for the majority of the
total deposits, the BOLI contracts allow for no more than 20% surrenders in any
given year.
The Company and GWL&A have administrative services agreements whereby GWL&A
administers, distributes, and underwrites business for the Company and
administers the Company's investment portfolio.
ITEM 2. PROPERTIES
The Company leases its home office in Albany, New York.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2000 to a vote of security
holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common equity.
B. DIVIDENDS
The Company has not paid dividends on its common shares.
Under New York law, the Company may distribute a dividend if the total of all
dividends paid in any calendar year does not exceed the lesser of (i) 10% of
surplus to policyholders as of the preceding December 31; or (ii) the net gain
from operations for the preceding calendar year, not including realized capital
gains. The Company cannot distribute any greater dividend amount unless a notice
of its intention to declare such dividend and the amount thereof has been filed
with the New York Superintendent of Insurance not less than thirty days in
advance of such proposed declaration. The Superintendent may disapprove of such
distribution by giving written notice to the Company within thirty days after
such filing stating that he finds the financial condition of the Company does
not warrant such distribution.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company. This
summary has been derived in part from, and should be read in conjunction with,
the consolidated financial statements of the Company included in Item 8
(Financial Statements and Supplementary Data).
For the
Period from
April 4, 1997
(inception)
through
(Dollars in Thousands) For the years ended December 31, December 31,
---------------------------------------
2000 1999 1998 1998
----------- ---------- ---------- - ---------------
INCOME STATEMENT DATA
Premium income $ 13,565 $ 9,144 $ (65) $ 21
Fee income 6,577 692 143
Net investment income 10,333 6,278 3,367 243
Realized investment
gains (losses) 67 (6) 74
----------- ---------- ---------- - ---------------
----------- ---------- ---------- - ---------------
Total Revenues 30,542 16,108 3,519 264
----------- ---------- ---------- - ---------------
----------- ---------- ---------- - ---------------
Total benefits and expenses 27,152 14,444 2,124 213
Income tax expense 1,346 641 603 18
----------- ---------- ---------- - ---------------
Net Income $ 2,044 $ 1,023 $ 792 $ 33
=========== ========== ========== = ===============
Deposits for investment-
type contracts $ 37,344 $ 20,000 $ 62,528 $
Deposits to separate
accounts 14,438 9,389 12,776
Self-funded premium
equivalents 16,225
BALANCE SHEET DATA
Investment assets $ 166,538 $ 112,799 $ 80,353 $ 5,381
Separate account assets 47,359 39,881 23,836 9,045
Total assets 247,806 171,710 107,095 16,154
Total policyholder 141,770 98,421 64,445 84
liabilities
Total stockholder's equity 36,074 30,614 16,642 6,538
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. In particular,
statements using verbs such as "expect," "anticipate," "believe" or words of
similar import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to the
insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation, and others of which may relate to the
Company specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio, and other factors. Readers are also directed
to consider other risks and uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission.
Management's discussion and analysis of financial condition and results of
operations of the Company for the years ended 2000 and 1999 follows.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $1.0 million in 2000 when
compared to 1999, reflecting growth in the Employee Benefits and Financial
Services segments during 2000. The Employee Benefits segment contributed $921
thousand to the improved consolidated results and the Financial Services segment
contributed a $100 thousand increase. Of total consolidated net income in 2000
and 1999, the Employee Benefits segment contributed 67% and 44%, respectively,
while the Financial Services segment contributed 33% and 56%, respectively.
The Employee Benefits segment began operations in 1999 by entering into an
assumption reinsurance agreement on December 1, 1999 with AH&L NY to acquire a
block of life and health insurance business. The subsequent operations resulting
from this agreement resulted in net income of $1.4 million and $446 thousand
being recorded in 2000 and 1999, respectively.
The Financial Services net income increased in 2000 primarily due to realized
gains on fixed maturities in 2000 of $67 thousand compared to realized losses in
1999 of $6 thousand and increased margins and fees on larger asset balances from
BOLI sales in 2000.
The Company's consolidated net income increased $231 thousand in 1999 when
compared to 1998. The increase in 1999 was primarily due to the acquisition of
AH&L NY and higher investment income resulting from increased BOLI sales.
In 2000, total revenues increased $14.4 million to $30.5 million when compared
to 1999. The growth in revenues in 2000 was comprised of increased premium and
fee income of $10.3 million, increased net investment income of $4.1 million and
increased realized gain on investments of $73 thousand.
The increased premium and fee income in 2000 was comprised of growth in Employee
Benefits and Financial Services premium and fee income of $10.1 million and $249
thousand, respectively.
Net investment income grew to $10.3 million and $6.3 million in 2000 and 1999,
respectively, from $3.4 million in 1998, primarily due to BOLI sales each year,
as well as a capital infusion from GWL&A of $16 million in 1999. The growth in
both years was primarily in the Financial Services segment.
Realized investment income from fixed maturities increased from $6 thousand in
1999 to $67 thousand in 2000. The realized investment gain in 2000 was the
result of sales of U.S. Treasury securities while the increase in interest rates
in 1999 contributed to fixed maturity losses.
Total benefits and expenses increased $12.7 million in 2000 when compared to
1999. The Employee Benefits segment contributed $9.6 million of the increase in
2000 compared to the Financial Services segment, which contributed $3.1 million.
The increase in total benefits and expenses was $12.3 million in 1999. The
increase in total benefits and expenses in the Employee Benefits segment in 2000
and 1999 resulted from the acquisition of the group health and life business
from AH&L NY in December 1999. The increases in Financial Services in both years
relates to higher interest credits on BOLI account balances and increased
operating expenses associated with growth in the Company's business.
Income tax expense increased $705 thousand in 2000 when compared to 1999. Income
tax expense increased $38 thousand in 1999 when compared to 1998. The increase
in income tax expense in 2000 reflected higher net earnings. The increase in
income tax expense from 1998 to 1999 reflected higher earnings in 1999. The
Company's effective tax rate was 39.7% in 2000 compared to 38.5% in 1999, due to
higher state income taxes in 2000. The Company's effective tax rate was 38.5% in
1999 compared to 43.2% in 1998, due to lower state income taxes in 1999 compared
to 1998.
In evaluating its results of operations, the Company also considers net changes
in deposits received for investment-type contracts, deposits to separate
accounts and self-funded equivalents. Self-funded equivalents generally
represent paid claims under minimum premium and administrative services only
contracts, which amounts approximate the additional premiums that would have
been earned under such contracts if they had been written as traditional
indemnity or HMO programs.
Deposits for investment-type contracts increased $17.3 million in 2000 when
compared to 1999, primarily due to BOLI deposits of $20.0 million in 1999
compared to $37.3 million in 2000. Deposits for investment-type contracts
decreased $42.5 million in 1999 when compared to 1998 due to a single premium of
$50.0 million on one case in 1998. BOLI sales are single premium and very large
in nature, and therefore, can vary from year to year.
Deposits for separate accounts increased $5.0 million in 2000 when compared to
1999. Deposits for separate accounts decreased $3.4 million in 1999 when
compared to 1998. This fluctuation is expected in the small market in which the
Company operates.
Self-funded premium equivalents were $16,225 in 2000, the first full year of
operations resulting from the AH&L NY assumption reinsurance agreement.
Total assets and liabilities increased $76.1 million or 44% when compared to
1999. The increase is primarily attributable to BOLI business.
2. Other Matters
On October 6, 1999, GWL&A entered into an agreement with First Allmerica
Financial Corporation ("Allmerica") to acquire, via reinsurance, Allmerica's
group life and health insurance business on March 1, 2000. The Allmerica
policies resident in the State of New York are expected to be underwritten and
retained by the Company upon each policy renewal date. This business primarily
consists of administrative services only and stop loss policies. The purchase
price is based on a percentage of the premium and administrative fees in force
at March 1, 2000 and March 1, 2001. Management does not expect the purchase
price to have a material impact on the Company's financial statements.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
On December 1, 1999, the Employee Benefits segment entered into a reinsurance
transaction with AH&L NY. The results below reflect the operations for the
Employee Benefits segment for the following periods:
(Thousands) Years Ended December 31,
-----------------------------------
2000 1999
--------------- ----------------
INCOME STATEMENT DATA
Premium income $ 13,467 $ 9,195
Fee income 6,215 430
Net investment income 1,111
--------------- ----------------
Total Revenues 20,793 9,625
--------------- ----------------
--------------- ----------------
Policyholder benefits 14,431 8,378
Operating expenses 4,087 506
--------------- ----------------
Total benefits and expenses 18,518 8,884
--------------- ----------------
Income from operations 2,275 741
Income tax expense 908 295
--------------- ----------------
Net Income $ 1,367 $ 446
Deposits to separate accounts 3,249
Self-funded premium equivalents 16,225
During 2000, the Employee Benefits segment had an overall increase in its
results of operations. The increases are due to the inclusion of a full year of
operating results in 2000, versus only one month in 1999, due to the AH&L NY
acquisition in December 1999. The Company also began marketing 401(k) savings
plans to customers to complete the overall product offering in the Employee
Benefits segment.
In 2001, the Company will continue to build upon the acquisition of the AH&L NY
business though new sales and the addition of the Allmerica group life and
health business.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
(Thousands) Years Ended December 31,
----------------------------------------
INCOME STATEMENT DATA 2000 1999 1998
------------ ----------- -----------
Premium income $ 98 $ (51) $ (65)
Fee income 362 262 143
Net investment income 9,222 6,278 3,367
Realized investment gains 67 (6) 74
(losses)
------------ ----------- -----------
Total Revenues 9,749 6,483 3,519
Policyholder benefits 7,261 4,600 1,737
Operating expenses 1,373 960 387
------------ ----------- -----------
Total benefits and expenses 8,634 5,560 2,124
------------ ----------- -----------
Income from operations 1,115 923 1,395
Income tax expense 438 346 603
------------ ----------- -----------
Net Income $ 677 $ 577 $ 792
============ =========== ===========
Deposits for investment-type
Contracts $ 37,344 $ 20,000 $ 62,528
Deposits to separate accounts 11,189 9,389 12,776
Net income for Financial Services increased $100 thousand in 2000 and decreased
$215 thousand in 1999. The realized investment gains increase of $73 thousand in
2000 was due primarily to realized gains on fixed maturities. The additional
earnings in 2000 reflected larger earnings from an increased asset base, an
increase in investment margins, and additional realized gains on fixed
maturities. The decrease in 1999 was due primarily to higher benefits related to
BOLI products and realized losses on fixed maturities in 1999 compared to
realized gains in 1998.
Premium and fee income increased $249 thousand in 2000 compared to an increase
of $133 thousand in 1999. The increase in 2000 was driven by higher fee income
related to growth in the separate accounts.
Deposits for investment type contracts included BOLI deposits of $37.3 million
in 2000 compared to $20.0 million in 1999. The nature of this type of product
leads to large fluctuations from year to year.
In 2000, the deposits for separate accounts increased $1.8 million to $11.2
million. Deposits for separate accounts decreased $3.4 million in 1999 to $9.4
million. The separate account assets have increased by $7.5 million and $16.0
million in 2000 and 1999, respectively, due to the new deposits.
Net investment income increased $2.9 million in 2000 compared to 1999 and $2.9
million in 1999 compared to 1998 primarily due to BOLI sales, as well as a
capital infusion from GWL&A of $16 million in 1999.
Total benefits and expenses increased $3.1 million in 2000 compared to $3.4
million in 1999 primarily due to additional interest credits on BOLI balances
and increased operating expenses.
D. INVESTMENTS
The Company's primary investment objective is to acquire assets whose durations
and cash flows reflect the characteristics of the Company's liabilities, while
meeting industry, size, issuer and geographic diversification standards. Formal
liquidity and credit quality parameters have also been established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines are
designed to ensure that even in changing interest rate environments, the
Company's assets will always be able to meet the cash flow and income
requirements of its liabilities. Using dynamic modeling to analyze the effects
of a wide range of possible market changes upon investments and policyholder
benefits, the Company ensures that its investment portfolio is appropriately
structured to fulfill financial obligations to its policyholders.
A summary of the Company's general account invested assets follows:
(Dollars in Thousands) 2000 1999
--------------- ----------------
Fixed maturities, available for sale, at fair $ 150,631 $ 74,149
value
Fixed maturities, held-to-maturity, at amortized 37,050
cost
Short-term investments 15,907 1,600
--------------- ----------------
Total invested assets $ 166,538 $ 112,799
=============== ================
During 2000, the Company transferred all securities classified as
held-to-maturity into the available-for-sale category. The Company recorded a
$645 unrealized gain associated with this transfer in other comprehensive
income, net of tax.
Fixed maturity investments include public and privately placed corporate bonds,
government bonds and mortgage-backed and asset-backed securities. Private
placement investments, which are primarily in the held-to-maturity category, are
generally less marketable than publicly traded assets, yet they typically offer
covenant protection which allows the Company, if necessary, to take appropriate
action to protect its investment. The Company believes that the cost of the
additional monitoring and analysis required by private placements is more than
offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed maturity
portfolio is maintained at a high average quality, so as to limit credit risk.
If not externally rated, the securities are rated by the Company on a basis
intended to be similar to that of the rating agencies.
The distribution of the fixed maturity portfolio by credit rating is summarized
as:
Credit Rating 2000 1999
-------------
-------------- --------------
AAA 62.8% 57.4%
AA 14.3 11.2
A 7.3 10.1
BBB 15.6 21.3
-------------- --------------
TOTAL 100.0% 100.0%
============== ==============
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that are dependent upon the
principal product lines currently offered. Life insurance and pension plan
reserves are primarily long-term liabilities. Life insurance and pension plan
reserve requirements are usually stable and predictable, and are supported by
long-term, fixed income investments.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio. Liquidity for the
Company is strong, as evidenced by significant amounts of short-term investments
and cash, which totaled $24.4 million and $7.0 million as of December 31, 2000
and 1999, respectively.
The Company and GWL&A have an agreement whereby GWL&A has undertaken to provide
the Company with certain financial support related to maintaining required
statutory surplus and liquidity.
F. ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which
provides guidance with respect to revenue recognition issues and disclosures. As
amended by SAB No. 101 no later than the fourth quarter of the fiscal year
ending December 31, 2000. The adoption of SAB No. 101 did not affect the
Company's revenue recognition practices.
See Note 1 to the Consolidated Financial Statements for additional information
regarding accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is exposure
to rising interest rates.
To manage interest rate risk, the Company invests in assets that are suited to
the products that it sells. For products with uncertain timing of benefit
payments such as life insurance, the Company invests in fixed income assets with
expected cash flows that are earlier than the expected timing of the benefit
payments. The Company can then react to changing interest rates as these assets
mature for reinvestment.
The Company has estimated the possible effects of interest rate changes at
December 31, 2000. If interest rates increased by 100 basis points (1%), the
fair value of the fixed income assets would decrease by approximately $8
million. The cash flow projections are shown in the table below. The table shows
cash flows rather than expected maturity dates because many of the Company's
assets have substantial expected principal payments prior to the final maturity
date. The fair value shown in the table below was calculated using spot discount
interest rates that varied by the year in which the cash flow was expected to be
received. These spot rates in the benchmark calculation ranged from 7.14% to
8.01%.
Projected Cash Flows by Calendar Year ($ millions)
There- Undiscounted Fair
2000 2001 2002 2003 2004 after Total Value
------- ------- -------- ------- ------- --------- --------------- ---------
Benchmark 13 13 19 14 19 139 219 144
Interest Rates
up 1% 13 13 19 14 18 142 221 136
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Financial Statements for the years ended
December 31, 2000 and 1999 and the Independent Auditors' Report thereon.
First Great-West Life & Annuity Insurance Company
(A wholly-owned subsidiary of Great-West Life & Annuity Insurance Company)
Financial Statements for the Years Ended
December 31, 2000, 1999, and 1998
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
First Great-West Life & Annuity Insurance Company:
We have audited the accompanying balance sheets of First Great-West Life &
Annuity Insurance Company (a wholly-owned subsidiary of Great-West Life &
Annuity Insurance Company) as of December 31, 2000 and 1999, and the related
statements of income, stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of First Great-West Life & Annuity Insurance
Company as of December 31, 2000 and 1999, and the results of its operations and
its cash flows for the each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
DELOITE & TOUCHE LLP
Denver, Colorado
January 29, 2001
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
==============================================================================================
(Dollars in Thousands, except for Share Information)
ASSETS 2000 1999
- ------
----------------- -----------------
INVESTMENTS:
Fixed maturities:
Held-to-maturity, at amortized cost
(fair value $35,335) $ $ 37,050
Available-for-sale, at fair value
(amortized cost $148,522 and $77,740) 150,631 74,149
Short-term investments, available-for-sale (cost
approximates fair value) 15,907 1,600
----------------- -----------------
Total Investments 166,538 112,799
OTHER ASSETS:
Cash 8,462 5,443
Reinsurance receivable 1,924 1,426
Deferred policy acquisition costs 1,717 1,702
Investment income due and accrued 1,325 1,204
Amounts receivable related to uninsured
accident and health plans 2,069
Other assets 4,596 3,366
Premiums in course of collection
(net of allowances of $776 and $580) 2,502 537
Deferred income taxes 1,107 2,050
Due from Parent Corporation 10,207 3,302
SEPARATE ACCOUNT ASSETS 47,359 39,881
----------------- -----------------
TOTAL ASSETS $ 247,806 $ 171,710
================= =================
(Continued)
==============================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 137,657 $ 93,434
Policy and contract claims 3,851 4,894
Policyholder funds 262 93
GENERAL LIABILITIES:
Bank overdrafts 8,954 1,508
Contract deposits 7,761
Other liabilities 5,888 1,286
SEPARATE ACCOUNT LIABILITIES 47,359 39,881
----------------- -----------------
Total Liabilities 211,732 141,096
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1,000 par value, 2,500 shares
Authorized, issued, and outstanding 2,500 2,500
Additional paid-in capital 28,600 28,600
Accumulated other comprehensive income (loss) 1,082 (2,334)
Retained earnings 3,892 1,848
----------------- -----------------
Total Stockholder's Equity 36,074 30,614
----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 247,806 $ 171,710
================= =================
See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
==============================================================================================
(Dollars in Thousands)
2000 1999 1998
--------------- --------------- --------------
REVENUES:
Premium income, net of premium ceded
of $109, $64, and $65 $ 13,565 $ 9,144 $ (65)
Fee income 6,577 692 143
Net investment income 10,333 6,278 3,367
Net realized gains (losses) on investments 67 (6) 74
--------------- --------------- --------------
30,542 16,108 3,519
--------------- --------------- --------------
BENEFITS AND EXPENSES:
Life and other policy benefits, net of
reinsurance recoveries of $964, $740,
and $75 15,625 4,391 50
(Decrease) increase in reserves (944) 4,003
Interest paid or credited to
Contractholders 7,011 4,584 1,687
General and administrative expenses 5,460 1,466 387
--------------- --------------- --------------
27,152 14,444 2,124
--------------- --------------- --------------
INCOME BEFORE INCOME TAXES 3,390 1,664 1,395
PROVISION FOR INCOME TAXES:
Current 2,307 65 1,920
Deferred (961) 576 (1,317)
--------------- --------------- --------------
1,346 641 603
--------------- --------------- --------------
NET INCOME $ 2,044 $ 1,023 $ 792
=============== =============== ==============
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands, except for Share Information)
Accumulated
Additional Other
Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss) Earnings Total
------------- ------------- ------------- --------------- ------------- -------------
BALANCE, JANUARY 1, 1998 2,500 $ 2,500 $ 4,000 $ 5 $ 33 $ 6,538
Net income 792 792
Other comprehensive income 712 712
-------------
Comprehensive income 1,504
-------------
Capital contribution 8,600 8,600
------------- ------------- ------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 2,500 2,500 12,600 717 825 16,642
Net income 1,023 1,023
Other comprehensive income (3,051) (3,051)
(loss)
-------------
Comprehensive income (loss) (2,028)
-------------
Capital contribution 16,000 16,000
------------- ------------- ------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 2,500 2,500 28,600 (2,334) 1,848 30,614
Net income 2,044 2,044
Other comprehensive income 3,416 3,416
-------------
Comprehensive income 5,460
------------- ------------- ------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 2,500 $ 2,500 $ 28,600 $ 1,082 $ 3,892 $ 36,074
============= ============= ============= =============== ============= =============
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands)
2000 1999 1998
------------ ------------ -------------
OPERATING ACTIVITIES:
Net income $ 2,044 $ 1,023 $ 792
Adjustments to reconcile net income to net cash
Provided by operating activities
Amortization of investments (1,032) 59 12
Realized (losses) gains on sale of (67) 6 (74)
investments
Amortization of deferred acquisition costs 213 112
Deferred income taxes (961) 576 (1,317)
Changes in assets and liabilities:
Accrued interest and other receivables (2,086) (1,046) (671)
Policy benefit liabilities 5,902 13,389 1,859
Reinsurance receivable (498) (1,303) (123)
Bank overdrafts 7,446 1,508
Contract deposits 7,761
Other, net 695 (2,765) (1,361)
------------ ------------ -------------
Net cash provided by (used in)
operating activities 19,417 11,559 (883)
------------ ------------ -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions of investments:
Fixed maturities:
Held-to-maturity 667 447
Available-for-sale 50,107 15,683 73,340
Purchases of investments:
Fixed maturities:
Held-to-maturity (14,144) (23,000) (14,500)
Available-for-sale (83,570) (31,066) (131,924)
------------ ------------ -------------
Net cash used in investing activities $ (46,940) $ (37,936) $ (73,084)
------------ ------------ -------------
See notes to financial statements. (Continued)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands)
2000 1999 1998
------------ ------------ -------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 37,447 20,494 62,502
Due (from) to Parent Corporation (6,905) (5,379) 1,922
Capital contributions 16,000 8,600
------------ ------------ -------------
Net cash provided by financing activities 30,542 31,115 73,024
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH 3,019 4,738 (943)
CASH, BEGINNING OF YEAR 5,443 705 1,648
------------ ------------ -------------
CASH, END OF YEAR $ 8,462 $ 5,443 $ 705
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid (received) during the year for:
Income taxes $ 2,217 $ (1,073) $ 2,390
See notes to financial statements. (Concluded)
45
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
================================================================================
(Dollars in Thousands)
1. ORGANIZATION
First Great-West Life & Annuity Insurance Company (the Company) is a
wholly-owned subsidiary of Great-West Life & Annuity Insurance Company
(the Parent Corporation). The Company was incorporated as a stock life
insurance company in the State of New York and was capitalized on April
4, 1997, through a $6,000 cash investment from the Parent Corporation
for 2,000 shares of common stock. On December 29, 1997, the Company
issued an additional 500 shares of common stock to the Parent
Corporation for $500. The Company was licensed as an insurance company
in the State of New York on May 28, 1997. The Company does business in
New York through two business segments, as discussed in Note 9.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash - Cash includes only amounts in demand deposit accounts.
Investments - Management determines the classification of fixed
maturities at the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated
at amortized cost unless fair value is less than cost and the decline is
deemed to be other than temporary, in which case they are written down
to fair value and a new cost basis is established (See Note 5).
Fixed maturities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with the net unrealized gains and losses reported as accumulated
other comprehensive income (loss) in stockholder's equity.
The amortized cost of fixed maturities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and
accretion of discounts using the effective interest method over the
estimated life of the related bonds. Such amortization is included in
net investment income. Realized gains and losses, and declines in value
judged to be other-than-temporary are included in net realized gains
(losses) on investments.
Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost. The
Company considers short-term investments to be available-for-sale and
amortized cost approximates fair value.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions related to the production of new
and renewal business, have been deferred to the extent recoverable.
Deferred costs associated with the annuity products are being amortized
over the life of the contracts in proportion to the emergence of gross
profits. Retrospective adjustments of these amounts are made when the
Company revises its estimates of current or future gross profits.
Deferred costs associated with traditional life insurance are amortized
over the premium paying period of the related policies in proportion to
premium revenues recognized. Amortization of deferred policy acquisition
costs was $213, $112, and $0 in 2000, 1999, and 1998, respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of various external mutual funds. Investment income and realized capital
gains and losses of the separate accounts accrue directly to the
contractholders and, therefore, are not included in the Company's
statements of income. Revenues to the Company from the separate accounts
consist of contract maintenance fees, administration fees, and mortality
and expense risk charges.
Policy Reserves - Life insurance reserves of $137,516 and $93,315 at
December 31, 2000 and 1999, respectively, are computed on the basis of
estimated mortality, investment yield, withdrawals, future maintenance
and settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies of $141
and $119 are carried at contractholders' account value at December 31,
2000 and 1999, respectively.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies.
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of settlement,
valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
Revenue Recognition - In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," which provides guidance with
respect to revenue recognition issues and disclosures. As amended by SAB
No. 101B, the Company was required to implement the provisions of SAB
No. 101 no later than the fourth quarter of the fiscal year ending
December 31, 2000. The adoption of SAB No. 101 did not affect the
Company's revenue recognition policies.
Recognition of Premium Income and Expenses - Life insurance premiums are
recognized when due. Accident and health premiums are earned on a
monthly pro rata basis. Revenues for annuity and other contracts without
significant life contingencies consist of contract charges for the cost
of insurance, contract administration, and surrender fees that have been
assessed against the contract account balance during the period, and are
realized as assessed and earned. Fee income is derived primarily from
contracts for claim processing or other administrative services related
to uninsured business and from assets under management. Fees from
contracts for claim processing or other administrative services are
recorded as the services are provided. Fees from assets under
management, which consist of contract maintenance fees, administration
fees and mortality and expense risk charges, are recognized when due.
Benefits and expenses on policies with life contingencies impact income
by means of the provision for future policy benefit reserves, resulting
in recognition of profits over the life of the contracts.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, all
expected future events (other than the enactments or changes in the tax
laws or rules) are considered.
Regulatory Requirements - In accordance with the requirements of the
State of New York, the Company must demonstrate adequate capital, as
defined. At December 31, 2000, the Company was in compliance with the
requirement.
The Company is also required to maintain an investment deposit in the
amount of $5,000 in cash or investment certificates with the New York
Insurance Commissioner for the protection of policyholders in the event
the Company is unable to satisfactorily meet its contractual
obligations. A United States Treasury obligation, whose cost
approximates market value, was designated to meet this requirement at
December 31, 2000.
Reclassifications - Certain amounts in the 1999 and 1998 financial
statements have been reclassified to conform to the 2000 presentation.
3. RELATED-PARTY TRANSACTIONS
The Company and the Parent Corporation have service agreements whereby
the Parent Corporation administers, distributes, and underwrites
business for the Company and administers the Company's investment
portfolio, and whereby, the Company provides certain services for the
Parent Corporation. The amounts recorded are based upon management's
best estimate of actual costs incurred and resources expended based upon
number of policies and/or certificates in force. These transactions are
summarized as follows:
Years Ended
December 31,
-------------------------------------
2000 1999 1998
============================================ ----------- ----------- -----------
Investment management expense
(included in net investment income) $ 128 $ 96 $ 47
Administrative services
(included in operating expenses) (19) (28) (48)
==============================================================================================
The Company and the Parent Corporation have an agreement whereby the
Parent Corporation has committed to provide certain financial support
related to maintaining adequate regulatory surplus and liquidity.
4. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains 100% of
the first $50 of coverage per individual life and has a maximum
retention of $250 per individual life. Life insurance policies are first
reinsured to the Parent Corporation up to a maximum of $1,250 of
coverage per individual life. Any excess amount is reinsured to a third
party.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 2000 and
1999, the reinsurance receivable had a carrying value of $1,924 and
$1,426, respectively.
Total reinsurance premiums ceded to the Parent Corporation in 2000,
1999, and 1998 were $77, $43, and $61, respectively.
On December 1, 1999, the Company entered into an assumption reinsurance
agreement with Anthem Health & Life Insurance Company of New York (AH&L
NY), to acquire a block of life and health insurance business. The
Company also agreed to the assignment of a coinsurance agreement between
the Parent and AH&L NY on certain policies that would not be transferred
to the Company via assumption reinsurance. The business primarily
consists of administration services only and stop loss policies. The
Company assumed $7,904 of policy reserves and miscellaneous assets and
liabilities in exchange for equal consideration from AH&L NY and the
Parent.
The following schedule details life insurance in force and life and
accident/health premiums:
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Other From Other Net Assumed
Amount Companies Companies Amount To Net
------------- ------------- ----------- ------------- -----------
December 31, 2000:
Life insurance in force:
Individual $ 468,463 $ 125,222 $ $ 343,241 0.0%
Group 623,454 623,454 0.0%
------------- ------------- ----------- -------------
Total $ 1,091,917 $ 125,222 $ $ 966,695
============= ============= =========== =============
Premium Income:
Life $ 3,193 $ 76 $ $ 3,117 0.0%
insurance
8,591 76 1,933 10,448 18.5%
Accident/health
------------- ------------- ----------- -------------
Total $ 11,784 $ 152 $ 1,933 $ 13,565
============= ============= =========== =============
December 31, 1999:
Life insurance in force:
Individual $ 329,346 $ 125,688 $ $ 203,658 0.0%
Group 1,075,000 1,075,000 0.0%
------------- ------------- ----------- -------------
Total $ 1,404,346 $ 125,688 $ $ 1,278,658
============= ============= =========== =============
Premium Income:
Life $ 685 $ 57 $ 93 $ 721 12.9%
insurance
9,471 1,064 23 8,430 0.3%
Accident/health
------------- ------------- ----------- -------------
Total $ 10,156 $ 1,121 $ 116 $ 9,151
============= ============= =========== =============
December 31, 1998:
Life insurance in force:
Individual $ 251,792 $ 173,773 $ $ 78,019 0.0%
Group 0.0%
------------- ------------- ----------- -------------
Total $ 251,792 $ 173,773 $ $ 78,019
============= ============= =========== =============
Premium Income:
Life $ $ $ $ 0.0%
insurance
61 (61) 0.0%
Accident/health
------------- ------------- ----------- -------------
Total $ $ 61 $ $ (61)
============= ============= =========== =============
5. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2000 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ----------- ----------- ---------- ----------
Available-for-Sale:
U.S. Government $ 52,169 $ 1,454 $ 25 $ 53,598 $ 53,598
Agencies
Collateralized
mortgage
obligations 9,953 237 9,716 9,716
Public utilities 7,000 218 7,218 7,218
Corporate bonds 29,029 160 991 28,198 28,198
Asset backed 50,371 1,743 213 51,901 51,901
securities
---------- ----------- ----------- ---------- ----------
$ 148,522 $ 3,575 $ 1,466 $ 150,631 $ 150,631
========== =========== =========== ========== ==========
Fixed maturities owned at December 31, 1999 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ----------- ----------- ---------- ----------
Held-to-Maturity:
U.S. Government $ $ $ $ $
Agencies
Collateralized
mortgage
obligations
Public utilities 7,000 2 7,002 7,000
Corporate bonds 14,284 825 13,459 14,284
Asset backed 15,766 892 14,874 15,766
securities
---------- ----------- ----------- ---------- ----------
$ 37,050 $ 2 $ 1,717 $ 35,335 $ 37,050
========== =========== =========== ========== ==========
Available-for-Sale:
U.S. Government $ 22,917 $ $ 635 $ 22,282 $ 22,282
Agencies
Collateralized
mortgage
obligations 19,952 1,371 18,581 18,581
Public utilities
Corporate bonds 15,007 1,025 13,982 13,982
Asset backed 19,864 560 19,304 19,304
securities
---------- ----------- ----------- ---------- ----------
$ 77,740 $ $ 3,591 $ 74,149 $ 74,149
========== =========== =========== ========== ==========
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 6 for additional information on policies regarding estimated
fair value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 2000, by projected maturity, are shown
below. Actual maturities will likely differ from these projections
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Available-for-Sale
------------------------
Amortized Estimated
Cost Fair Value
----------- -----------
Due in one year or less $ 2,634 $ 2,767
Due after one year through five 18,102 18,815
years
Due after five years through ten 47,308 47,333
years
Due after ten years 2,298 2,254
Mortgage-backed securities 27,808 27,561
Asset-backed securities 50,372 51,901
----------- -----------
$ 148,522 $ 150,631
=========== ===========
Proceeds from sales of securities available-for-sale were $44,237,
$15,158, and $68,109 during 2000, 1999, and 1998, respectively. The
realized gains on such sales totaled $296, $15, and $201 for 2000, 1999,
and 1998, respectively. The realized losses totaled $229, $21, and $127
for 2000, 1999, and 1998, respectively.
During 2000, the Company transferred all securities classified as
held-to-maturity into the available-for-sale category. The Company
recorded a $645 unrealized gain associated with this transfer in other
comprehensive income, net of tax.
6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
--------------------------------------------------
2000 1999
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
ASSETS:
Fixed maturities and short-term
Investments $ 166,538 $ 166,538 $ 112,799 $ 111,084
LIABILITIES:
Annuity contract reserves
without
life contingencies 141 141 119 119
The estimated fair value of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded
are obtained from an independent pricing service. To determine fair
value for fixed maturities not actively traded, the Company utilized
discounted cash flows calculated at current market rates on investments
of similar quality and term.
The fair value of annuity contract reserves without life contingencies
are estimated by discounting the cash flows to maturity of the
contracts, utilizing current credited rates for similar products.
The carrying amounts for receivables and liabilities reported in the
balance sheet approximate fair value due to their short-term nature.
7. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate
and the Company's effective rate:
2000 1999 1998
----------- ----------- ------------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
State taxes 5.6 4.6 6.8
Other (0.9) (1.1) 1.4
----------- ----------- ------------
Total 39.7 % 38.5 % 43.2 %
=========== =========== ============
Temporary differences, which give rise to the deferred tax assets and
liabilities as of December 31, 2000 and 1999, are as follows:
2000 1999
-------------------- --------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
--------- --------- --------- ---------
Policy reserves $ 204 $ 128
Deferred policy
acquisition costs $ 601 $ 596
Deferred acquisition
cost proxy tax 2,226 1,312
Investment assets 753 1,254
State taxes 31 48
--------- --------- --------- ---------
Total deferred taxes $ 2,461 $ 1,354 $ 2,694 $ 644
========= ========= ========= =========
Amounts related to investment assets above include $738 and $(1,256)
related to the unrealized gains (losses) on the Company's fixed
maturities available-for-sale at December 31, 2000, and 1999,
respectively. Although realization is not assured, management believes
it is more likely than not that all of the deferred tax asset will be
realized.
The Company and its Parent have entered into an income tax allocation
agreement whereby the Parent could file a consolidated federal income
tax return. Under the agreement the Company is responsible for and will
receive the benefits of any income tax liability or benefit computed on
a separate basis. In 2000, the Company will file on a consolidated basis
with its Parent.
8. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income".
This Statement establishes new rules for reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or stockholder's
equity. This Statement requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in other
comprehensive income (loss).
Other comprehensive income (loss) at December 31, 2000 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- -------------- ---------------
Unrealized gains on
available-for-sale securities:
Unrealized holding gains
arising during the period $ 5,700 $ (1,995) $ 3,705
-------------- -------------- ---------------
Net unrealized gains 5,700 (1,995) 3,705
Reserve and DAC adjustment (444) 155 (289)
-------------- -------------- ---------------
Other comprehensive income (loss) $ 5,256 $ (1,840) $ 3,416
============== ============== ===============
Other comprehensive income (loss) at December 31, 1999 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- -------------- ---------------
Unrealized gains on
available-for-sale securities:
Unrealized holding gains
Arising during the period $ (5,425) $ 1,900 $ (3,525)
-------------- -------------- ---------------
Net unrealized gains (5,425) 1,900 (3,525)
Reserve and DAC adjustment 729 (255) 474
-------------- -------------- ---------------
Other comprehensive income (loss) $ (4,696) $ 1,645 $ (3,051)
============== ============== ===============
Other comprehensive income at December 31, 1998 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- -------------- ---------------
Unrealized gains on
available-for-sale securities:
Unrealized holding gains
Arising during the period $ 1,826 $ (639) $ 1,187
-------------- -------------- ---------------
Net unrealized gains 1,826 (639) 1,187
Reserve and DAC adjustment (730) 255 (475)
-------------- -------------- ---------------
Other comprehensive income $ 1,096 $ (384) $ 712
============== ============== ===============
9. SEGMENT INFORMATION
During 2000 and 1999, the Company had two reportable segments: Employee
Benefits and Financial Services. During 1998, the Company had only one
reportable segment, Financial Services. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately, as each segment has unique
distribution channels. The Employee Benefits segment markets group life
and health and 401(k) products to small and mid-sized corporate
employers. The Financial Services segment primarily markets products to
public and not-for-profit employers and individuals and offers life
insurance products to individuals and businesses. In both 2000 and 1999
the Financial Services segment sold large dollar bank-owned life
insurance policies to a limited number of customers. Accordingly, these
transactions account for the majority of the investment assets and
reserves, and significantly impact the results of operations, of this
segment.
The accounting policies of the segments are the same as those described
in Note 2. The Company evaluates performance based on profit or loss
from operations after income taxes.
The Company's operations are not materially dependent on one or a few
customers, brokers, or agents.
Summarized segment financial information for the year ended and as of
December 31, 2000 was as follows:
Operations: Employee Financial
Benefits Services Total
-------------- -------------- ---------------
Revenue:
Premium income $ 13,467 $ 98 $ 13,565
Fee income 6,215 362 6,577
Net investment income 1,111 9,222 10,333
Realized investment gains 67 67
-------------- -------------- ---------------
Total revenue 20,793 9,749 30,542
Benefits and Expenses:
Benefits 14,431 7,261 21,692
Operating expenses 4,087 1,373 5,460
-------------- -------------- ---------------
Total benefits and expenses 18,518 8,634 27,152
Net operating income before
Income taxes 2,275 1,115 3,390
Income taxes 908 438 1,346
-------------- -------------- ---------------
Net income $ 1,367 $ 677 $ 2,044
============== ============== ===============
Assets:
Investment assets $ 16,906 $ 149,284 $ 166,538
Other assets 24,207 10,050 33,909
Separate account assets 47,359 47,359
-------------- -------------- ---------------
Total assets $ 41,113 $ 206,693 $ 247,806
============== ============== ===============
Summarized segment financial information for the year ended and as of
December 31, 1999 was as follows:
Operations: Employee Financial
Benefits Services Total
-------------- -------------- ---------------
Revenue:
Premium income $ 9,195 $ (51) $ 9,144
Fee income 430 262 692
Net investment income 6,278 6,278
Realized investment gains (losses) (6) (6)
-------------- -------------- ---------------
Total revenue 9,625 6,483 16,108
Benefits and Expenses:
Benefits 8,378 4,600 12,978
Operating expenses 505 961 1,466
-------------- -------------- ---------------
Total benefits and expenses 8,883 5,561 14,444
Net operating income before
Income taxes 741 923 1,664
Income taxes 295 346 641
-------------- -------------- ---------------
Net income $ 446 $ 577 $ 1,023
============== ============== ===============
Assets:
Investment assets $ $ 112,799 $ 112,799
Other assets 7,851 11,179 19,030
Separate account assets 39,881 39,881
-------------- -------------- ---------------
Total assets $ 7,851 $ 163,859 $ 171,710
============== ============== ===============
10. ACQUISITION
On October 6, 1999, the Parent entered into a purchase and sale
agreement (the Agreement) with First Allmerica Financial
Corporation (Allmerica) to acquire, via assumption reinsurance,
Allmerica's group life and health insurance business on March 1,
2000. The policies resident in the State of New York have been
assigned to the Company as part of the Agreement.